4 Gold and Silver Breakout Stock Plays - 47160 views

Despite the fact that the overall market is trending slightly lower today, there are plenty of leading stocks and sectors that are starting to show up in my scans for breakout plays.

This is why I continue to emphasize that if you want to find the next big trends and trades that will produce large profits, you have to follow the action in key individual stocks, not the overall market. Even as the market trends lower, some stocks and sectors will demonstrate relative strength and buck that trend.

Relative strength is a measure of price trend that indicates how a stock is performing relative to other stocks in its sector or to the overall market. When large institutional money managers, such as hedge funds, want to own something badly enough, they don’t necessarily care what the rest of the market is doing. As long as the overall market isn’t in a free fall, then the big players will continue to allocate capital to the market leaders.

Scanning for stocks with relative strength is how you'll find high-quality breakouts on big volume. Once you start finding stocks that are breaking out on big volume, then you give yourself a chance as a trader to find equities that are in the early stages of massive moves higher. And at the end of the day, that's what we want: stocks that are setting up to trade significantly higher. At least, I know that’s what I want, and I want to find them as quickly as possible.

A breakout occurs when a stock makes a move through a significant level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street players love to see an upside breakout because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. An upside breakout can also take a stock to new highs, which will generate a lot of interest as the stock shows up on sophisticated software that scans for this type of action.

Two sectors that are starting to break out are gold and silver, which means it's time for market players to start searching these sectors for breakout plays. That brings us to NovaGold Resources (NG), which is engaged in the exploration and development of mineral properties in Alaska, the U.S. and British Columbia, Canada. This gold play is an absolute market leader in the precious metals complex, with shares up an outrageous 160% so far in 2010.

If you take a look at the chart, you’ll see that NovaGold is starting to trade above some previous overhead resistance at around $15.40 a share. What’s great about this breakout in NovaGold is that it’s coming on big volume. Volume today is tracking in at around 5.3 million shares, which is well above the three-month average volume of 4.5 million shares. This is a great sign if you’re bullish on the stock because large-volume breakouts increase the probability of a sustained move higher.

The way this stock is setting up right now makes me think that a run toward the all-time high of around $21 a share is in the cards.

Keep in mind that over 9.7% of the tradable float of 138 million shares is sold short by the bears as of Nov. 15. This high short interest could be the fuel to push shares higher now that the stock is starting to breakout. Most intelligent bears aren’t going to want to stay short a stock that is breaking out on big volume, so put this name on your trading radar.

Another name in the precious metals space that is starting to break out is the iShares Silver Trust ETF (SLV). This ETF is a highly liquid pure play on the price of spot silver for investors that don’t want to trade silver in the futures market. This ETF has been a market leader all year, with shares up 75% so far in 2010.

The chart for the iShares Silver Trust ETF shows a breakout forming now that this ETF has started to trade above some previous overhead resistance at around $28.72 a share. It appears that a lot of the move in the SLV today was spurred by some comments from Federal Reserve Chairman Ben Bernanke in a CBS 60 Minutes interview Sunday night. Bernanke said that the central bank would consider initiating more quantitative easing to lower bond yields and make stocks look more attractive, thus inspiring economic growth in the country.

Investors are interpreting these remarks as bullish for precious metals, fearing that in the long term the Fed will print large amounts of dollars and devalue the currency -- even though during the interview, Bernanke said it was a "myth" that the Fed would be printing more money and taking inflation risks through its bond purchases. The action in gold and silver imply that the market is still voting that dollar currency devaluation is going to continue.

This is a clear example of when, as a trend trader, I would not listen to the noise out of the Fed and instead follow the price action in the market -- and right now the action in the iShares Silver Trust ETF is breaking out and telling you it wants to go higher. How much higher can it go? There’s really no telling since this pure play on silver is now trading at an all-time high.

What’s even more significant with the breakout in SLV is the extremely high volume we’re seeing today as the stock makes this move. So far more than 45 million shares have traded hands on the SLV, which is well above the three-month average trading volume of just 23 million shares. This is exactly the type of volume you want to see when any stock breaks out.

I would also advise investors to take a look at the SPDR Gold Shares ETF (GLD), which is an ETF that tracks the sport price of gold. This pure play on gold will officially hit a breakout once it clears $139.15 a share. With the current price of the GLD trading around $138 a share, we’re very close to that key breakout level. Market players should look for volume above the three-month average trading volume of 16.7 million shares to confirm a breakout in the GLD.

One final stock that market players should take a look at in the precious metals complex is Freeport-McMoRan Copper & Gold (FCX), which engages in the exploration, mining and production of mineral resources, primarily exploring for copper, gold, molybdenum, silver and cobalt deposits. This stock has done reasonably well this year, with shares up 37% so far.

If you take a look at the chart for Freeport-McMoRan, you’ll see that this stock has started to break out above some previous overhead resistance at around $108.50 a share. You can also see on the chart that FCX recently found solid support at around $96 a share, which formed a launching pad for the stock to make its current run at a breakout. What’s even more bullish about FCX is the uptrend channel that is in place on the stock. This bullish trading channel started back in August, and if you look at the chart, you’ll notice that FCX has never broken below the lower trend line in the channel.

Market players should now watch for volume on a closing basis to come in above the three-month average trading action of 11.3 million shares. Presently, the volume is around 7.7 million shares, so this breakout as of right now doesn’t have the volume I would like to see. This doesn’t mean the stock can’t trade higher --just that if you’re bullish it would be more constructive to see some big volume come in the next few trading sessions (as long as the breakout holds) to confirm that a much more sustained move higher is in the cards.

If the breakout on Freeport can hold, and if the volume can really start to pick up, then I think this major gold and copper stock could easily make a run toward its all-time high at around $124 a share. That’s a nice move of around 14 points from current levels, so keep this name on your trading watch list.

At the time of publication, author had no positions in stocks mentioned.

Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.